Can Contracts Signal Social Norms? Experimental Evidence

Abstract

We investigate whether incentive schemes signal social norms and thus affect behavior beyond their direct economic consequences. A one-shot principal–agent experiment is studied where prior to contract choice principals are informed about the past actions of other agents and thus have more information about norms of behavior. Compared with a setting in which principals are uninformed, agents exert substantially higher effort under a fixed wage contract when they are aware that an informed principal chose this contract. The informed principal’s choice apparently signals a norm not to exploit trust, which leads to more trustworthy behavior. This mechanism’s robustness is explored in further experiments. Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2015.2336 . This paper was accepted by Uri Gneezy, behavioral economics.